How industry went nuts

Four decades ago, the managing agency system was done away with. To ensure that the companies were managed by their own boards. The noble idea was to promote professional management in corporate India.

But the managing agents were not to be so easily bowled out. They never left the crease. On the other hand, they tightened hold on the companies they once managed. Helped on by the funds-hungry political parties. And pliable financial institutions. Delhi could always be depended upon – for a price.

The cause of Indian industry suffered in the process. No purposeful development. Only an outcrop of unrelated investments. In the name of diversification. Often qualified as dynamic. At the cost of competitive edge across the spectrum.

In the event, the Indian industry lay shattered. Unable to face global markets. No segment is safe. With below par infrastructure. All talk of reviving the set-up is bunkum. 
Worse. The lessons are unlearnt. Almost every industrial house is vying with each other now for a piece of aviation, petrochemical and insurance. With blessings from the powers – that - be. Though they all have a host of sick companies in their stable. History repeats itself. This time as a tragedy.

Remember the good (sic) old managing agency system? That over-hang the Indian corporate world in the first half of 20th century? It was put in the dock for milking the companies and stifling their growth. They bought - and sold - raw materials and finished products. But the profit went to their accounts. Losses always borne by the companies they managed.

There was hue and cry for its repeal. The shareholders were dubbed (legally) the owners of the companies. But they were mere mute witnesses to the corporate ravages by the managing agents. The simmering discontent found expression in a memorandum from the Bombay Shareholders’ Association. Which, in inimitable prose, called for its (the system’s) abrogation.

It explained how the managing agents inflicted irreparable damages on corporate growth. Mark, the memorandum was not drafted by socialists. Though there were many of them then who declared war on managing agents. Behind the draft were legal luminaries. With the best of intentions. The industry was going haywire they warned. On the altar of the managing agency system.

Finally, the government scrapped the system. And it was all over in the early sixties. The managing agents packed up. But did not check out. On the other hand, they stayed put. Obeying the law in letters. Not in spirit. Devising new methods to control the same companies they had under their thumb for long.

Those who pressed for the managing agents’ exit had a different set up in mind. They wanted the companies managed by their own independent boards. The word professional was not in vogue then. But the opposition to managing agency longed for the stage set just for that – the professional management of companies.

But the erstwhile managing agents were well-versed in the art of survival. They took new avatars as directors, managing directors and chairmen. Had their own men for buying and selling. Black money gushed. The political set-up was also ideal. The leaders/parties need wherewithal.

The managing agents ruled the companies on the strength of agreements. For their successors no such things were necessary. The financial institutions floated to promote industries were at their beck and call. Banks too. A sort of guild system prevailed.

What followed was a mockery of industrial development. The private/public sector controversy went in favour of the former. Capital intensive projects with low profit margin bulked large in the public sector. In the private, the norm was commodity production. Where profit margin was high. Thanks to the high tariff walls. Erected in the name of protecting local industry - and employment.

In the event what happened? A skien of unrelated investments. Justified in terms of a wider base. To cushion possible shocks elsewhere. Those who started with steel, found thrill in producing common salt and tea-powder, managing hotels and travel agencies. Though tourism never took off as a result, the empire building went on. Then from textiles to cement, pig iron etc. The story is repeated right across the industrial landscape.

A high gearing-ratio of corporate giants sparked the economic crisis that roiled SE Asia in 1997. Debt often worked up to five times or more of the capital base. Parsed, Indian industry is no different. Most of the industrial houses lorded it over their companies though owning less than five per cent of the equity. In many cases it is as low as one per cent or less. If public money (channeled through financial institutions) is taken apart, the debt-equity ratio could be seen to be hovering around despicable levels.

The financial institutions were more royal than the king. No questions asked when share prices collapsed and export targets were not met. Their nominees on company boards were (and are) a spineless lot. Settling for personal equations. Scandals galore. On crumps thrown. 

As a result, the nation suffered. The industry lost its competitive edge. And the landscape is dotted with a host of uneconomic units. On a rough calculation 95 per cent of the Indian industry is so. Unable to stand the withering competition that is being unleashed from across the borders.

It’s unthinkably expensive to redo the set-up at this stage. Faced with extinction, quite a few industrial houses are only willing to shed weight. But there are no takers for the jaded outfits. Cement factories, sponge iron units and plantations are languishing. In other words, value (GDP) is being destroyed. But the government and its agencies are out in the field to protect the incumbents. Against the so called predators.

The real tragedy is that the point was not taken on board. The misplaced ‘swadeshi’ spirit is making things worse. Its motto is to encourage inefficiency further. The priority should go to the cleaning of Aegian stables. Many units are about to fold up. But who cares? That well is the way of governments. Irrespective of their hues and philosophy.

Breaking new ground
To be sure, it is wrong to say that none of the Indian industrialists thought of the virtues of integrated operations. There was indeed loud thinking here and there but nothing came up as a programme plan or a policy proposal.

The late J.R.D.Tata was the first who did kite flying on mega projects. Time was in the sixties. Tata Steel was in the thick of doubling its capacity to 2 million tonnes (TMT).

TMT was the buzz word on Dalal Street. How it would impact Tata Steel’s bottom-line. And mark, Tata Steel was the leading counter on the Bombay Stock Exchange. The one who was not happy with it all was TMT’s architect - J.R.D.Tata. “TMT is not enough”, he was telling the media persons often in his ever so many casual encounters with them.

Jealously perhaps, he was pointing to Japan where new steel plants were being fashioned with an annual average capacity of 10 million tonnes.

The Pohang Steel of South Korea was also coming up. With $600 million received from Japan by way of war reparations. It was also planning massive capacity. At about 28 million tonnes in installed capacity now, it is the cheapest supplier of steel in the world.

J.R.D. wanted only one or two steel plants in India. He was afraid of saying so loudly as the two steel plants (other being Indian Iron) were in the private sector. And New Delhi was going full stream ahead with its own ideas of steel industry.

Tata never said ‘scale’, as the word was not in vogue. But he wanted a steel plant in full size to reduce the weight of the huge overheads on saleable products. This could be done only if the project size was much bigger.

Few listened. Tata unveiled yet another mega project. This time a fertilizer unit. The economies of scale was convincing at a glance. Taking into account the exploding demand for fertilizer. Unfortunately JRD was not on a strong wicket (as he used to be always). The project was based on imported ammonia not naphtha. But the pricing of ammonia in the international market could not be taken for granted. And a project based on imported naphtha could have cost a fortune more.

Others felt outraged too. Tata project needed huge investment. Then India’s capital market was not broad enough. There was the case of one company cornering all its funds. IDBI was not in the picture. Only ICICI and IFCI. The Tata project would have sucked them dry. Leaving not even crumbs for others.

Early in the eighties, the late B.M.Ghia also thought aloud a major project. He wanted a naphtha cracker set up in Chennai, where his Indian Organic Chemicals (IOC) was based. He pursued it for a while. But then there were no takers. Though he was able to line up support from a few European companies. It also needed huge investments amounting to $250 million at the prevailing exchange rate.

Finally the credit for implementing a world scale manufacturing facility goes to Dhirubhai H Ambani of Reliance. For the first time in the history of industrial India. There was undivided focus on the structure and organisation of a single project. Obstacles were far too many. Reliance excited controversy for playing the game according to the rules laid out by others before him.

As a new entrepreneur he was not accepted in business circles. Even banks were unfriendly. As the story goes a Bombay branch (Mandvi) of Indian Overseas Bank refused him an enhancement in credit facility. In the sixties. It was an uphill task calling for swashbuckling skills of the highest order. Its detractors of course, still insist that the company’s core competence was in making friends and influence at right places. However, at the end of it all the final product has been saleable and competitive. As things stand, Reliance is the only company that will stand up to the gales once the chips are down on 1 April 2002.

The strategy was clear amidst the fog of controversy. Reliance graduated from commodity production to integrated operations stretching from oil exploration and refining to full fledged petrochemicals manufacturing. That facilitated a scheme of things yielding maximum consumer satisfaction. There was no anxiety to diversify far away from the main stream business, as it was the case in earlier enterprises. 

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